Semtech Corp (SMTC) 2013 Q3 法說會逐字稿

Good evening. My name is Matthew and I'll be your conference operator today. At this time, I would like to welcome everyone to the Semtech Q3 fiscal year 2013 earning release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

I would now like to turn the call over to your host, Ms. Linda Brewton. Ms. Brewton, you may begin.

Thank you, Matthew. Welcome to Semtech's fiscal year 2013 third-quarter conference call. I'm Linda Brewton, Senior Manager of Investor Relations. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer, and Emeka Chukwu, our Chief Financial Officer. Our press release announcing our unaudited results for the quarter ended October 28, 2012 was issued after the market closed today and is available on our website at www.semtech.com.

Today's call will include forward-looking statements that include risks and uncertainties that could cause actual results to differ materially from the results anticipated in these statements. For a more detailed discussion of these risks and uncertainties please review the Safe Harbor Statement included in today's press release, as well as the other Risk Factors section of our most recent periodic reports on Form 10-Q and 10-Q filed with the Securities and Exchange Commission. As a reminder, comments made on today's call are current as of today only. Semtech undertakes no obligation to update the information in this call should facts or circumstances change.

During the call we may refer to pro forma or other financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. A discussion of why the Management team considers non-GAAP information useful along with detailed reconciliations between GAAP and non-GAAP results are included in today's press release.

I would also like to mention that Semtech will be participating on the Williams Financial Group Management Discussion series teleconference on December 10 at 1 PM Eastern. The dial-in information will be published on the events section of our Investor Relations web page. With that I will now turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu.

Thank you, Linda. Good afternoon, everyone. Semtech's third quarter of fiscal year 2013 was a record quarter with revenues of $160.9 million, up 7% sequentially and up 30% from the same quarter last year. Q3 revenue included $8.1 million from IP licensed and compared to $400,000 in Q2. Included in the IP licensing revenue, Gennum contributed approximately $45.3 million in revenue for the quarter. In Q3, sales into Asia represented 68% of revenue, North America represented 20% and Europe represented 12% of total revenue. Direct sales represented approximately 64% of total revenue while distribution made up 36%. In Q3 the Company achieved record bookings, driving book-to-bill for the quarter to well over 1. Bookings were fairly linear throughout the quarter. Bookings grew across all end markets. [Total] bookings accounted for approximately 46% of shipments during the quarter.

Gross margin on a GAAP basis for Q3 was 60.2%, an increase of 1,070 basis points from the 49.5% posted in Q2. The increase in gross margin was driven primarily by a lower amortization of deferred value inventory adjustment related to the Gennum acquisition resulted prior quarter. In addition, the higher level of IP licensing revenue received in Q3 benefited GAAP gross margin by approximately 200 basis points. For Q4, we expect GAAP gross margin in the range of 58.3% to 58.9%. Included in this estimate is approximately 300 basis points from the $4.4 million in amortization of deferred value adjustment in inventory from the Gennum acquisition. We expect this fair value adjustment to be fully amortized in Q1 of fiscal year 2014.

Operating expenses on a GAAP basis were $77.2 million, up 8% from the prior quarter due to higher variable compensation expense resulting from higher revenue. In addition, we resolved $2.5 million for environmental monitoring and remediation at the former Semtech facility. In Q4 we expect our GAAP operating expenses to be down from Q3, driven by the non-recurring result for environmental clean up, lower variable expenses due to lower revenue, and lower compensation expenses due to the holidays. We recorded an expense of $5.2 million in interest and other in Q3, compared to an expense of $4 million in Q2. The larger expense was primarily attributable to the impact of foreign currency exchange rates. We expect interest and other expenses of approximately $4.4 million in Q4.

In Q3, we recognized a GAAP tax benefit of $2.3 million versus a benefit of $11.3 million in Q2. Recall that our tax benefit in Q2 was unusually high because of a true-up for the regional tax impact of purchase accounting adjustments related to the Gennum acquisition. Our lower Q3 tax benefits represented a return to more normalized tax provision levels. We expect our GAAP tax rate for Q4 to be between 0% and 2%. Our GAAP diluted earnings per share for Q3 was $0.25. Approximately $0.07 of this amount was attributable to the higher level of IP licensing revenue received in the quarter.

Now turning to our results on a non-GAAP basis which excludes the impact of equity compensation, amortization of acquired intangibles, acquisition-related expenses, and other one-time expenses. Gross margin was a record 63.1% for Q3, up from 61.2% in Q2. Non-GAAP gross margin benefited by approximately 190 basis points from the higher level of IP licensing received during the quarter. We expect Q4 non-GAAP gross margin to be between 61.5% and 62% due to lower IP revenue in Q4 compared to Q3. Excluding the higher IP revenue in Q3, our Q4 non-GAAP gross margin outlook represents a sequential increase of 40 to 80 basis points, reflecting a favorable revenue mix and higher manufacturing cost synergies from the Gennum acquisition. In Q3, our non-GAAP operating margin increased by 380 basis points to 27.3% due to higher revenue and gross margin. Our non-GAAP effective tax rate for Q3 was 6.8%, down from 12.5% in Q2, reflecting a higher mix of foreign income. We expect our Q4 non-GAAP tax rate to be between 8% and 9%. Non-GAAP diluted earnings per share increased 29% sequentially to a record $0.53. As a reminder, approximately $0.07 of this amount was attributable to the higher level of IP licensing revenue received in the quarter.

Our cash and investment balance at the end of the quarter was approximately $218 million, up 26% from Q2. The increase in cash was primarily attributable to higher net income, partially offset by principal payments on the term loans used to fund the Gennum acquisition. In Q3 we paid approximately $9.1 million in principal and interest. The Company did not repurchase any shares during the quarter. Our top priorities for the use of cash are to pay down our debt and to buy back shares to minimize dilution from employee equity stock awards. We currently have a $50 million authorization in place. The Company spent approximately $7.4 million on property, plant, and equipment in the quarter. In Q4, we expect to spend approximately $7 million, mainly for manufacturing equipment and IT infrastructure improvements. Depreciation for Q3 was approximately $4 million. In Q4 we expect the depreciation to be about $4.9 million.

Accounts receivable decreased by 6% sequentially in Q3, primarily as a result of improved shipments linearity during the quarter. Our days sales outstanding were 42 days, down from 43 days last quarter. Net inventory in dollar terms was $74 million for Q3, a 3% decline from Q2 due to the amortization of the fair value adjustment of the acquired Gennum inventory. On a days basis net inventory decreased from 102 days in Q2 to 100 days in Q3. We expect our Q4 inventory in absolute dollars to be sequentially flat. Although we plan to [view proper] inventory in response to short lead time orders, we believe this will be offset by amortization of the fair value adjustment of the acquired Gennum inventory.

In summary, Q3 was a very strong quarter with record revenue, record non-GAAP gross margin, and record non-GAAP earnings per share. We are on track to achieving the synergies on a non-GAAP EPS accretion that we anticipated from the Gennum acquisition. Going forward, our priorities remain ensuring the successful integration of Gennum and driving to our target non-GAAP operating margin range of 25% to 30% through -- one, top line growth driven by secular trends; two, stable gross margins; and three, control of operating expense growth from improved leverage on current levels of R&D and G&A spending. I will now hand the call over to Mohan.

Thank you, Emeka. Good afternoon everyone. I will discuss our Q3 fiscal-year 2013 performance by end market and by product group and then provide our outlook for Q4 of fiscal year 2013.

In Q3 of fiscal year 2013 we achieved record net revenues of $160.9 million, an increase of 7% from Q2 of fiscal year 2013, and an increase of approximately 30% from Q3 of fiscal year 2012. Our non-GAAP gross margin was a record 63.1% and our non-GAAP diluted earnings per share was a record $0.53 per share. In Q3, our consumer, computing, and industrial end markets grew, while communications declined as previously anticipated.

Our revenue by end market was as follows. Communications represented approximately 29% of total revenues, high-end consumer represented 28% of total revenues, approximately 17% of this revenue was attributable to handheld devices, and approximately 11% was attributable to other consumer systems. Revenue from the industrial end market represented 23% of revenues, and revenue from the enterprise computing end market represented 20% of revenues.

Now let me discuss the performance of each of our product groups. In Q2, our Protection business grew 5% sequentially and represented 32% of total Semtech revenues. Growth was driven by primarily by high-end consumer applications, including smartphone sales into Asia and North America. Protection sales into the industrial end market were steady while computing and communications were relatively soft. Our Protection business will continue to benefit from several key trends driving the need for more protection in electronic equipment. Firstly, the number and types of electronic devices that require port protection continue to increase. High performance ports have become ubiquitous beyond Smartphone devices and can now be found in tablets, set top boxes, TVs, laptops, enterprise computing, and automotive systems. Secondly, the signal bandwidth of each of these ports is increasing as end users continue to demand faster and more sophisticated functionality from their electronic equipment. And third, processes and ASICs are transitioning to next generation lithography nodes, making these expensive devices far more vulnerable to ESD events.

In Q3 our Protection business saw strong design win traction. We also introduced several new protection platforms targeted at protecting next generation interfaces such as SD memory card interfaces for automotive infotainment consoles, HDMI, DisplayPort, and LVDS interfaces. The combination of our small form factor, low capacitance, low leakage current, high ESD protection, and flexible design layout makes Semtech Solutions the protection platform of choice for leading edge design engineers. In Q4, we expect our Protection business to decline in line with normal seasonality.

Turning to our Advanced Communications Product Group. Revenue in Q3 declined 7% sequentially and represented 21% of total revenues. The decrease reflects normal carrier spending patterns which can result in revenue being rather lumpy on a quarter-to-quarter basis; however the long-term growth trajectory for this business continues to be strong as the ongoing demand for more bandwidth necessitates the building or upgrading of core infrastructure in order to satisfy this demand and eliminate bottlenecks in communications networks. We are very pleased with the ramp up of our market leading 100-gig products and expect the overall business to grow nicely as the macroeconomic situation continues to stabilize.

In Q3, we saw strong design win traction and celebrated several new product launches, strengthening our leadership position in the advanced communications space. First we announced the availability of our 100-gigabit per second Mux for ultra-long-haul applications. This device significantly improves optical transmission for ultra long haul and submarine optical links. Secondly we began sampling our latest ToPSync platform which is the world's first one-chip synchronization system incorporating all telecom timing standards including synchronous ethernet and IEEE 1588. This technology will lower the cost of wireless equipment across networks, including small cell networks and significantly improve time to market for our customers building packet-based networks. Also during Q3, we achieved a milestone for our timing synchronization business, when we surpassed 1 million network elements deploying our ToPSync platform. Our ToPSync platform facilitates low cost 4G LTE wireless network deployments by lowering cost, size, and power while increasing flexibility and performance. In Q4, we expect our Advanced Communication business to grow nicely from Q3.

Now let's turn to our Power Management and High Reliability Product Group. In Q3 revenue for the group decreased sequentially by 1% and represented 11% of revenues. The decrease was driven by softness in high-end consumer, including set top boxes and other consumer applications, partially offset by growth in industrial applications such as automotive displays. In Q3, we experienced steady design win traction, our Power Management and High Reliability business is making head way, differentiating itself in terms of size, design simplicity, and power efficiency. In Q3 we launched the first device in our platform of high efficiency, micropower, step-down switching regulators for use in battery powered and line powered consumer electronics. The SC4530 is a 30-Volt buck regulator that helps customers achieve their power efficiency goals by providing longer stand-by time and increasing light load efficiency up to 10%. In Q4, we expect our Power Management and High Reliability revenues to be approximately flat.

In Q3, revenue from our Wireless and Sensing Product Group grew 5% sequentially to represent 8% of total revenues. The growth in revenue was driven primarily by strength in our medical business, somewhat offset by overall industrial weakness. In Q3, we introduced our next generation capacitive touch platform with high resolution sensing. This family of touch button ICs is ideally suited for the growing ecofriendly home electronics market. Semtech's technology provides robustness to touch-button applications while minimizing power consumption in LCD TVs, monitors, white goods, and consumer electronics. We also signed our first OEM agreement with a tier 1 customer in the automated metering space to deliver an industrial wireless solution using our Cycleo IP. In addition a second tier 1 customer is in negotiation on a second agreement and several energy service providers are also currently evaluating the Cycleo technology. In Q4 we expect sales for our Wireless and Sensing Product Group to grow slightly driven by our industrial wireless applications.

Q3 was another record revenue quarter for our Gennum Product Group, which grew revenues 28% sequentially to represent 28% of total revenues. In fact, the Gennum Product Group sales, including IP sales, were the highest sales in the 39 year history of the former Gennum Company. The Gennum growth in Q3 was primarily driven by strength in the high-end consumer market, the video surveillance market, and the enterprise computing market. Revenue for our market leading Thunderbolt products began ramping ahead of the holiday season as the adoption of this revolutionary new interface technology accelerates in high performance video, storage, and display systems. We expect demand for our Thunderbolt products to continue to increase throughout Q4.

The growth in demand for Gennum's physical media devices and clock data recovery backplane products is being driven by PON, SAN, and other data center applications as bandwidth bottlenecks emerge in these segments. New service provider PON deployments and new high bandwidth data center deployments will continue to drive the demand for Gennum's PMD and CDR products in Q4 and throughout FY '14. In Q3 Semtech also showcased the latest Gennum video product line at the International Broadcasting Convention in Amsterdam, featuring Gennum's latest video products, including the world's longest reach SDI equalizer and the industry's most advanced cable driver. We believe that our Gennum Product Group is very well positioned to advantage of the emerging 4K ultra-high-definition video standards which we believe will define the future of broadcast video and will also become a pervasive technology in high-end consumer electronics.

In Q3, we also benefited from unusually high IP licensing revenues. Historically, Gennum's IP revenue has been approximately $12 million per year. In Q3, Gennum's IP revenue was approximately $8.1 million, driven by SerDes licenses in the enterprise computing segment. We expect that in future quarters, IP licensing revenue will be approximately $0.5 million per quarter recorded as revenue and approximately $1.5 million per quarter recorded as a reduction of OpEx depending on the type of IP licensing agreement. Q3 was also a solid design win quarter for the Gennum Product Group. Looking ahead to Q4, Gennum product revenue will increase nicely and it is expected to reach another quarterly record.

In Q3, we saw distribution POS decrease slightly. Distributor inventory also declined 2 days from 66 days in Q2 to 64 days in Q3. This is below our 70- to 80-day channel inventory model. Our distributor business much like the overall Semtech business is very well balanced with 48% of the total POS coming from consumer and computing end markets, and 52% of total POS coming from industrial and communications end markets.

Moving on to new products and design wins. In Q3 we released 11 new products and achieved 1,278 new design wins, reflecting solid design win traction with customers. Our strategy of bringing analog and mixed signal innovative platforms to the fastest growing segments of the market continues to be validated by customer acceptance and solid design win activity. We expect a continuation of these trends in Q4.

Now let me discuss our outlook for next quarter. Based on recent booking trends and our backlog entering the quarter we are currently estimating Q4 net revenue to be between $146 million and $152 million. To attain the midpoint of our guidance range or approximately $149 million, we needed net turns orders of approximately 40% at the beginning of Q4. We expect our Q4 GAAP earnings to be between $0.13 and $0.17 per diluted share and our Q4 non-GAAP earnings to be between $0.41 and $0.45 per diluted share. Although customers are exercising caution in ordering and managing inventory due to uncertainty in overall macroeconomic conditions, we believe end-market demand for Semtech products remains relatively robust. Much of our business is driven by secular industry trends that we believe will continue to enable us to outperform the overall market. These secular trends include bandwidth expansion, energy efficiency and harvesting, and the miniaturization of electronics.

I will now hand the call back to the operator and Linda, Emeka, and I would be happy to answer any questions. Operator?

(Operator Instructions)

James Schneider.

On the outlook, clearly if I strip out the IP revenues from your Q3 results you're guiding a little bit stronger than most of your peers in the space, so I was wondering if you could comment on the level of conservatism in your guidance. I think you guided 40% turns versus 43% last quarter, maybe just give us a sense on the environment, what you're seeing in terms of customer order trends. You talked about some higher bookings levels and can you give us a sense of how much of that is in longer days of bookings versus bookings for the current quarter? Thanks.

So yes, obviously we mentioned we had record bookings in Q3. Bookings have softened as we came into Q4 and so that gives us a little bit of pause in terms of the guidance. I would say also that just general macro-nervousness and concern at customers about how Christmas is going to play out in the holiday season, how strong it's going to be from a consumer standpoint gives us some concern as well. But I would say generally as we mentioned on the call that the backlog is fairly robust and we believe that 40% turns is an achievable number.

Thanks, that's helpful. And then just to follow-up on the optical and communications infrastructure business, can you talk to us about what trends you're seeing there in Q4, and specifically what are customers telling you about their levels of inventory and whether they plan to reduce those or increase them from current levels?

So in our business it's largely two areas, it's the 40 gig, 100 gig SerDes devices and our TopSync timing platforms, we don't think the inventory is high in any of those areas and we know that there are new service provider contracts that are being implemented now that will drive reasonable demand which is why we are forecasting that our Com business will be up in Q4.

We also on the enterprise computing side a lot of that is PON driven by similar type of contracts, I think we'll ensure that the enterprise computing side is fairly robust. In general the overall Com space I would say is still fairly outside those kind of some segments of the marketplace is fairly weak. I wouldn't say it's strong at all, but I think in specific areas, especially where there's expansion of bandwidth, I think the demand is okay.

Thanks. And just lastly, a quick clarification, when you talked about the Gennum business being up in Q4 that means the entire business, so if I just looked at the product revenues within Gennum, that would be up quite substantially, is that correct?

Yes, exactly. So the Gennum product business if you take out the IP licensing even from Q3 was up significantly and will be up significantly again in Q4, and it's driven by really three main areas. One is our Thunderbolt products that I mentioned in the consumer space and the second area is driven by the enterprise computing side, the data center side and the PON side. And then the third is our backplane products also, so we expect all of them to do quite well in Q4.

Thanks so much.

Terence Whalen, Citi.

Congratulations on the strong results. The first question is a little bit of a higher level question. Mohan, you've pursued the strategy of growing through acquisition, and done so quite successfully, more recently as we've seen semi growth decelerate over the past several years we see more CEOs perhaps more inclined to pursue similar strategies. Can you just sort of evaluate where you are with regard to the digestion of Gennum? And also sort of your imperative to proceed on to the next acquisition to continue growing top line? Thank you.

So with regard to Gennum, I think we're in very good shape. We feel the integration is going quite well. Clearly from a sales standpoint, we are now really have one sales team that's selling the Gennum products and the Semtech products, there's a lot of sales synergies there in terms of customers, et cetera. From a strategy standpoint there's alignment I would say on the functional side, a lot of the integration of systems, et cetera, has gone very well. So I'm very, very pleased with how the Gennum acquisition and integration has gone and that's clearly demonstrated in the results. The results are no accident, the fact that we are generating record product revenues and record overall revenues and very good traction there I think is part of the reason why I'm comfortable saying that the acquisition integration has gone well.

As it pertains to going forward we've always had a strategy of growth and we look at organic and we look at external growth and when the opportunity is there, we will go look at that very carefully. I would say though and this is why we've been successful with the acquisitions is we focus a lot of the attention on execution, and until we are comfortable that we're executing superbly well on all fronts, we won't pursue anything else, and so that's a key part of the overall strategy.

The other aspect of the acquisition is also the balance, we want to maintain the balance, both from an end market standpoint and a product standpoint and a geographical standpoint, so that's also a critical piece of it, and then also the financial model. As you know, we have a very rigid financial model, we expect very good gross margins, very good operating margins. And at the moment with the Gennum acquisition we are not at the operating margins that we need to be so we have some work to go there. So I think we will continue to look at the acquisition but it's not one of those things that I think we have to go do immediately. We can balance it with the growth of the market.

Okay, very helpful. And the second follow-up question I have is regarding your larger customer who typically destocks inventory in the calendar fourth quarter in your fiscal fourth quarter. I was wondering if you could give us an update on the trends that you're seeing at that customer, how much of a headwind destocking might be in Q4 versus perhaps some new opportunities with new models, thank you.

Well we build that into our guidance and our thinking, Terence, it happens every year, it's not something that's a surprise to us. Obviously we get the benefit of January pick up also and we also have Chinese New Year, so it's a little bit of pull ahead in terms of what's going on there. So it really balances out I think for us because of the way our quarter shapes up so I don't expect any major changes. We are seeing obviously there's a lot of battles and competing out there in the handheld market but that's going to play out I think over the next few years and we expect Samsung at least to be continued player in that market.

Thanks and congrats.

Rick Schafer, Oppenheimer Company.

I'll add my congratulations guys on a nice quarter. Couple questions. First is just kind of back on the Gennum thing. Have you guys realized most or all of the cost savings or synergies associated with Gennum? And maybe even a broader question there is when do you think you'll get to target operating expense levels as a percent of revenues? Or maybe just if you can't put a timeline on it maybe just give us a hint of what that revenue level would be.

So yes Rick, this is Emeka. I think we've done a very good job as Mohan indicated before with integrating the acquisition and being able to achieve the level of service that we anticipated. I think on the operating expense side we have really moved along very nicely and have already baked in most of those.

Where we still have some room to grow is on the manufacturing cost side of things. We've done a very good job already but we still have some runway there, so we look forward to really achieving most of that by the first half of next year. With regards to the spending levels, I think the way to address your question is to say that we do expect that our revenues of $700 million to $800 million -- annual revenues of $700 million to $800 million, we should be around the mid point of our target range of 25% to 30% on a non-GAAP basis.

Great, that's really helpful. And then second question, just back on the SerDes business can you give us an update on the break down now between how that revenue splits out between 40 and 100 gig now? And do you guys think we'll see the crossover next year or is it further out?

Well we're seeing the crossover start to occur now. Rick, I think that the unit growth in 100 gig is quite large versus 40 gig, and the ASPs obviously are coming down a little bit faster in 40 gig than they are 100 gig, so you see a little bit more balance on the revenue side versus on 100 gig versus 40 gig versus the unit side. So on the unit side it's more like an 80/20, 80% being 40 gig and 20% 100 gig. On the revenue side it's more of a 60/40 kind of split.

Great, that's really helpful. And the pricing you are talking about, are you guys finally starting to see any competition there either at 40 or 100 gig?

Well there is competition. There has been a competition. I think the most important thing to remember is a lot of the competition when they talk 100 gig and 40 gig and things like that, they are normally talking on the client side. Most of our business is on the line side where we mostly compete against the ASICs and internal guys.

We're seeing a little bit of more competition there as the market grows, but it's a challenging area. When companies bring out products to the marketplace, the time it takes them to get that designed in, to get the customers to qualify and for the service providers to qualify in their systems and that to generate revenue is quite some time. So I would say today it's still the biggest threat to us and the biggest -- the risk for us that we look at is the internal customers who are not using off the shelf components and their growth in the marketplace, in other words if they happen to do well in the marketplace and our customers who buy our products lose share essentially then that hurts us.

Right and on the line side then where do we sit today in terms of captive versus merchant?

I would say it's probably 70/30 merchant versus captive.

Okay, thank you very much.

Ian Ing, Lazard Capital.

Congratulations. For Gennum, the strength in video broadcast, could you talk a bit about that? Is that a result of some ramps for the acquisition or design wins before acquisition or some more recent initiatives you talked about in the past about creating new opportunities in this business, perhaps exploring demand elasticity?

Yes, actually in the strength in the Gennum business was more on the Thunderbolt CDR product which goes in the consumer space and all the what I'll call enterprise computing data com products like amplifiers and CDR products that go into the PON data center space. That's where the majority of the strength has been and was in Q3 and we expect that to be most of the strength in Q4. I alluded to the video broadcast products as being a fairly new initiative on the 4K side and we are hopeful that that -- we'll be leaders in driving that transition in the marketplace, but that's not where the revenue growth is going to come from in the next year.

I see. And for telecom the China OEMs, do you think they're still focused on these 40 gig deployments or is there transition to 100 gig coherence?

100 gig coherent and 100 gig transition is occurring, I would say that we still expect 40 gig to continue to do quite well for the next few years but 100 gig is definitely transitioning and we're seeing that and that's -- we get the benefit of higher ASPs on that so that's good.

Okay. And my last question is you've had exposure to a North American smartphone OEM, has been a bit of a headwind in recent quarters. Perhaps is that fair to say that's stabilized or what are your thoughts on that going forward?

Yes, that's fair to say it's stabilized and it's kind of bottomed out.

Okay.

(Operator Instructions)

Elizabeth Howell, Raymond James Company.

Thanks, I'm calling in for Steve Smigie. I just also wanted to add my congratulations on a great quarter and guide. Could you give an update on your Thunderbolt business, where you see this market growing to and perhaps what percent of revenue this is currently?

It's small percentage of revenues. I don't want to give a number out there but it's really small today. It's not significant I wouldn't say. Potentially it's a sizeable market. It's really driven by very, very high bandwidth cables into hard drives, into storage systems, into video systems, into displays and you can look at many of the issues out there today in the consumer space and it's all about getting a lot of bandwidth from A to B. So Thunderbolt is essentially a strategy to kind of fix that bottleneck and we happen to be the only real supplier out there today, so we're confident that as that market grows we'll do quite well. Our customers talk about continued increase in the demand and we'll ride that curve with it. It's a relatively small market today though. I want to be sure that you don't interpret it as a huge market today. It's a relatively small market I would say in the $5 million to $10 million range and probably growing to twice that next year.

Okay, great. And then are you seeing any increased competition there? Or is it primarily just you guys?

Today I think it's just us. We hear about other competitors but as far as we know, we're the only providers to our customers, at least the ones we service anyway.

Okay, and then my last one just if you could talk a bit about your lead times and how they've been trending over the past couple months.

On the order lead times have pretty much stabilized I would say in the consumer space and the enterprise computing space, we had very little visibility. I mean the visibility is not great in the Com area, industrial it's little bit longer but not great, so lead times are short, which reflects in the turns number we have a higher percentage of turns than in an environment where demand is really, really strong, but it's not so bad. I think it's somewhat balanced there.

Great. Thanks.

Terence Whalen, Citigroup.

The first follow-up is regarding the wireline business, and as we look at the mix of SerDes move more toward 100 g from 40 g, just wanted to understand whether there was any effect on gross margin as we see that transition emerge next year, thanks.

No, Terence, I think the gross margin should be pretty much in line with what we see at the moment. Our 100 gig products we will generate higher gross margin but we'll see offset, that will be offset I think somewhat by the 40 gig prices which will probably generate a little bit lower gross margin. So the balance I think the gross margins for the business should stay about the same.

Thanks, and then maybe more broadly if we take a look at gross margin, you are above your target gross margin level here of 60%. Can you talk a little bit about the thinking that goes behind the decision to not raise target gross margin? In other words, what flexibility do you need in gross margin to pursue other growth opportunities, and how do you think about that versus actually raising the gross margin target? Thanks.

Yes, so Terence, I think you've captured the issue fairly well and that is the fact that we're a Company that really very much focused on growing the top line and it is our belief that with the market exposures that we have the consumer computing content that we have in our revenue that for us to continue to really outperform our peers in the industry in terms of top line growth we want to make sure that we have a right balance between growth and gross margin. And that is why despite the fact that we're seeing gross margins much higher than our 55% to 60% range, we think that in the long term, we are expecting a lot of growth to come from the consumer segment, the Thunderbolts, the smartphones, and the communication sites so we do believe that in the long run, 55% to 60% is the gross margin range that should allow us to continue to outperform in terms of top line growth.

And then perhaps Emeka, if I could press you a little further. To preserve that flexibility, what sort of top line growth do you envision in your target model based on having that flexibility? Relative to market growth perhaps, thank you.

Well, Terence, what we have always said is that we expect to grow at least 3 points faster than the industry growth rates, and that is also through that we have actually done much better than that and hopefully that will continue. But I don't know that I'm going to be able to give you a number, except just I'll refer you to the previous guidance of industry plus 3.

Okay, I appreciate it, thank you.

(Operator Instructions)

It looks as if there are no further audio questions at this time.

Okay, let me summarize by saying that Q3 of fiscal year 2013 was another very strong quarter for Semtech. We posted record revenues, record bookings, record non-GAAP gross margin, record non-GAAP operating income, and record non-GAAP earnings per share. In addition we generated $47.5 million in free cash flow and effectively managed our working capital.

Semtech's strategy of balance and analog diversification across product groups and markets, geographies and customers has enabled us to outperform our peer group in various market conditions, and we believe our ability to identify and capitalize on the long-term growth trends that will shape our industry for many years to come is fundamental to how we create lasting value for shareholders. With that we thank you for your continued support of Semtech and look forward to updating you all next quarter. Thank you.

This concludes today's teleconference. You may now disconnect.